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29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice
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India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
India education   us$45bn private education - opportunity everyone wants a slice
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Transcript of "India education us$45bn private education - opportunity everyone wants a slice"

  1. 1. Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research 29 December 2011 Sujan Hajra +9122 66266720 sujanhajra@rathi.com Atul Thakkar +9122 66266724 atulthakkar@rathi.com India I Equities Indian Education US$45bn private education opportunity: Everyone wants a slice
  2. 2. Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities Education Sector Report India I Equities Key data BB code M.Cap (US$m) Rating CMP (`) TP (`) Upside (%) PE(x) PBV(x) EV/EBITDA(x) ROE (%) Career Point CRPT IN Equity 75.7 Buy 216 284 31.5 14.9 1.2 9.5 7.5 Core Education CETL IN Equity 556.9 Buy 258 340 31.8 9.3 1.8 6.1 20.7 Educomp EDSL IN Equity 369.0 Hold 200 260 30.0 4.5 0.7 3.5 16.4 NIIT NIIT IN Equity 117.5 Buy 37 52 40.5 6.0 0.7 3.3 11.6 Tree House THEAL IN Equity 109.0 Buy 168 225 33.9 18.6 1.9 9.6 10.5 Source: Companies, Anand Rathi Research Note: * Prices as on 26th December, 2011; Valuation data for FY13e. based on CMP Sujan Hajra +9122 66266720 sujanhajra@rathi.com Atul Thakkar +9122 66266724 atulthakkar@rathi.com 29 December 2011 India Education US$45bn private education opportunity: Everyone wants a slice At US$600bn, yearly education spend in India is larger than that of the US at comparable prices. Estimated revenue CAGR of private entrepreneurs in education, at 19% during 2011-’15 (US$45bn by 2015), is also one of the world’s fastest, and is expected to be driven by a sharp rise in household spend, with median income elasticity of 2. Public policy is likely to aid incumbents but to defocus private players from K-12. Skill and vocational training are emerging as key opportunities. High growth, limited investable opportunities and the recession-proof nature of the education sector are likely to keep valuations high. We initiate coverage with a positive stance. Top picks: NIIT and Tree House.  At US$600bn, India’s education sector is bigger than that of the US. With US$600bn of yearly overall education spend at comparable prices, India’s education sector is bigger than that of the US. Even at a value of US$100bn by market prices, education spend in India is the 9th highest. India’s yearly growth in education spend, at 15%, is also one of the fastest.  Private education revenue growing 19%, to touch US$45bn by 2015. From US$30bn in 2012, private education revenue is set to reach US$45bn by 2015. Main revenue streams: K-12 (US$20bn), technical education (US$12bn), coaching (US$8bn) & pre-school (US$3bn).  Over 10% of wallet. 10.4% of total consumer spend of the urban affluent (top 10% by spend) funds private education. The rural poorest (bottom 10%) spends just 1.4% of wallet on education. With median income elasticity of demand for education at near 2, a 1% rise in per capita income leads to 2% rise in spend, mostly on private education. This is a key driver for the sector.  Public policy to defocus private players from K-12. Formal education in India is on a non-profit basis. While ongoing reforms may help incumbents, the Right to Information Act may deter private players from K-12.  Skill enhancement: the next big thing. Shortage of trainers and ICT- based interface are likely to challenge classroom-based coaching models. Private players are expected to focus on technical education and pre-schools. Also, the gulf between formal education and the market’s skill requirements is driving demand for vocational education and skill development services.  Top picks: NIIT & Tree House due to low regulatory risk. The sector’s rich valuations of +40x forward earnings during FY07-11 were affected by governance and funding issues. We expect these to be resolved and initiate coverage on Career Point, Core Education, NIIT & Tree House with Buy ratings and Educomp with a Hold. Overweight Sensex: 15971 Nifty: 4779
  3. 3. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 2 India Education US$45bn private education opportunity: Everyone wants a slice Everyone wants a slice............................................................................ 3 Rising trends in education spend............................................................. 9 Pre-schools: Legally for-profit................................................................ 15 K-12: large spend, highly regulated....................................................... 19 Higher education: Capex heavy............................................................. 25 Tutorials: An urban phenomenon .......................................................... 28 Vocational training ................................................................................. 31 Public policy: the good, bad & ugly........................................................ 34 Listed companies................................................................................... 41 Career Point..................................................................................... 42 Core Education................................................................................ 57 Educomp.......................................................................................... 71 NIIT .................................................................................................. 86 Tree House.................................................................................... 101 Aptech............................................................................................ 115 Edserve.......................................................................................... 116 Everonn.......................................................................................... 117 Zee Learn....................................................................................... 118 Unlisted companies.............................................................................. 119 Annexures............................................................................................ 136
  4. 4. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 3 Everyone wants a slice At US$600bn, yearly education spend by government and households in India is larger than that of the US at comparable prices. The estimated CAGR of private revenue in Indian education, at 19% during ’11-’15, is also one of the fastest in the world. We expect revenue of private entrepreneurs in education at US$45bn by 2015. A sharp rise in household spend on education with median income elasticity of 2 is driving this growth. Public policy is likely to aid the incumbents but is also likely to steer private entrepreneurs away from school education. Skill and vocational training are emerging as big opportunities for private players. High growth, scarcity of investable opportunities and the recession-proof nature of the sector are likely to keep valuations high. Large size, strong growth, bullish expectations At US$100bn a year at market prices, India’s education sector is among the top 10 in the world in value terms (see Fig 1).1 In addition, the cost of educational services in India is one of the lowest in the world – less than one-sixth of the global average (see Fig 2)2. That is, if measured in global average prices, yearly education spend in India at US$600bn is even higher than in the US. Revenue growth in the sector is also one of the fastest worldwide. Since 2000, education spend has grown at a median rate of 15% per year – 200 basis points (bps) higher than the GDP. Of the overall education spend (of US$100bn) households constitute 35%, which is on the high side (see Fig 3) as compared to most other countries.3 The revenue size of the addressable market for private investment in education is ~US$30bn. This is growing at an annual rate of 17% and is likely to accelerate to 19% from now until 2015. The large size of India’s education pie is attracting entrepreneurs and financiers by droves. The rapid expansion of private institutes over the last 5-6 years (see Fig 4), particularly technical and professional institutes, reflects the entrepreneurial wave in the education industry. Financial investors are picking up stakes in these ventures, and investment deals taking place in this space command jaw-dropping valuation multiples (See Annexure I and II). The addressable market for private investment is currently ~US$30bn and is growing at an annual rate of 19% Fig 1 – India: among the top-10 markets by education spend 0 50 100 150 200 250 300 US Japan France UK Germany Italy Brazil Canada India Spain Indonesia SouthKorea Mexico Russia Australia Netherlands Belgium Sweden Poland Switzerland (Educationspending,US$billion) 1,189 Source: World Bank and Anand Rathi Research Fig 2 – Price of education in India 1/6th of world average 0 25 50 75 100 125 150 175 200 225 250 275 India Indonesia Russia China Poland Mexico Brazil SouthKorea Spain Australia Canada France Netherlands Italy Belgium Sweden Japan UK Germany US Switzerland (Priceindexforeducation,Worldprice=100) Source: World Bank and Anand Rathi Research Note: Please see page 143 for the explanation of all references
  5. 5. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 4 Anatomy of the Indian education sector Three key rungs of the educational system Formal education: This comprises school, college, university and technical/professional education. The core, or formal, education system in India is highly regulated. A key policy condition is that formal education institutes need to operate on a non-profit basis. Parallel education: This system is largely informal, runs parallel to the core, and mainly supplements formal education. The components of the parallel system include pre-school, private tuition/coaching, test/examination preparation and job/skill-oriented vocational institutes, corporate training and finishing schools. Parallel education is virtually outside the scope of any specific regulatory or supervisory system. Ancillary education: The last rung in the educational system feeds the other two, and comprises teacher training, textbooks and stationery, IT-enabled teaching aids and management of education services. The ancillary rung too is virtually outside the scope of any specific regulatory or supervisory system. Nature of education according to ownership and management Government institutes: Public sector entities own and manage government institutes. This constitutes the bulk, nearly 75%, of India’s educational system, but the rate of expansion of these institutes is slowing. Private-aided institutes: Private-aided institutes are managed by private entities but receive grants from public authorities. The fee structure for students and salary structure for teaching and non-teaching staff is aligned to the public sector. This segment is part of the public education system. Private-unaided institutes: These are owned and operated by private trusts/societies/non-profit companies/individuals. This report considers only institutes in this category as private institutes. Private institutes operate at all levels of the system: core, parallel and ancillary. In the case of formal education, if private institutes generate any surplus, it has to be retained by the institute and cannot be distributed to other entities. Segments of the Indian education sector Indian Education Sector Core Parallel Ancillary Primary education Secondary education Higher educationsecondary Higher education (e.g: Technical, Medical & General) K-12 Pre schools Coaching Test preparation Vocational training Corporate training ICT / Multimedia & Online content Teacher training Books & stationery Management & ERP Post graduation (e.g: Doctorate, MBA etc.) Source: Anand Rathi Research Education sector: Risk-reward matrix India education Risk: regulatory / investment / scaleable High Medium Low High K-12 (management contracts) Sports education Vocational training Medium Higher education / university Test prep & tutorials; Pre-school Returnsovernext5yrs Low K-12 (own schools) Corporate training, language courses ERP / IT; Multimedia ICT; books & stationery Source: Anand Rathi Research
  6. 6. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 5 Currently, 65% of Indian students go to government institutes and 11% go to government-aided private institutes (see Fig 8), where elementary education is free. Consequently, cost of education in India is half that of China, one-fourth that of Mexico, one-tenth that of Canada and one- fifteenth that of the US (see Fig 2). Investment rationale: key attractions of the sector Public funding crunch; inadequate facilities. Public spend in education accounts for over 60% of overall education spend (see Fig 5). Yet, current educational facilities are inadequate in terms of both quantity and quality. Seats available for post-higher-secondary (tertiary) education are sufficient for just 12% of the population in the age group to avail themselves of tertiary education. Technical and professional education receives only 4% of budgetary spend and, therefore, a large number of private technical/ professional education institutes (see Fig 4) have cropped up to meet the capacity shortfall. Given serious budget constraints faced by public authorities,4 large private participation is required to expand infrastructure, create adequate access and improve the quality of education. Fig 5 – Though down from 70% to 60%, public funds dominate education spend 20 30 40 50 60 70 FY51 FY56 FY61 FY66 FY71 FY76 FY81 FY86 FY91 FY96 FY01 FY06 FY11 (Shareofpub.inedu.spending,%) Source: Central Statistical Organisation, Anand Rathi Research Rising household spend: Rising affordability and increased awareness of the strong benefits of education, particularly technical and professional, have led to a major increase in the demand for education. The share of education in total consumer spend rises sharply from 1.4% for the poorest Fig 3 – Public education spend in India at 70% of total 20 30 40 50 60 70 80 90 100 Indonesia SouthKorea US Japan India Australia UK Canada Mexico Netherlands Germany Russia Spain Poland France Italy Belgium Sweden Switzerland Brazil (Shareofpub.inedu.spend,decadalavg.,%) Source: World Bank, Anand Rathi Research Fig 4 – 260% jump in no. of technical colleges since 2005 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 (Numberofcolleges) Colleges-General Colleges-Technical Source: Ministry of Human Resource Development, Anand Rathi Research Factors such as lack of public funding, households’ willingness and ability to pay for quality education and public authorities’ pro-active stance on education reform are driving private investment in the sector
  7. 7. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 6 to over 10% for the richest. This indicates that as per head income increases in the country and more people transcend the poverty line, there should be explosive growth in household spend on education. Perceived quality gap in public education. Perceived quality gaps are driving even lower income students to shift from public education to private. This shift is happening even in the case of elementary education, despite the free tuition, mid-day meals, uniforms and books offered by public elementary education.5 As the proportion of students pursuing private education rises (see Fig 6), there is a corresponding increase in private investment entering the sector. Fig 6 – Rising proportion of students opting for private education 0 10 20 30 40 50 60 70 80 Govt Pvt. Aided Pvt. Un- aided Govt Pvt. Aided Pvt. Un- aided Overall Technical (Shareinoverallstudents,%) 1996 2008 2012 Source: National Sample Survey Organisation, Anand Rathi Research Education reforms Despite the rising demand for skilled manpower as a result of India’s rapid economic growth, employers find a majority of new graduates are unemployable on account of inadequacies in the educational system.6 Consequently, legislative efforts are underway to reform the system. Key education bills are at different stages of deliberation in the Indian Parliament. These target improving quality, accessibility, transparency and competition in the sector. The Central government’s pro-active stance and supportive statements have created the impression that private investment in education is reaching inflexion point for explosive growth. Private education: The next five years Estimated at US$30bn currently, India’s private education industry is expected to grow to US$45bn by 2015. We expect dynamic growth in private investment in education simply because there is strong and rising demand for such services and the public education system is not equipped to supply the same in terms of either quality or quantity. Pending key changes in public policy on education, we expect three major trends to emerge over the next five years:  Incumbent private players to consolidate their position in formal education,  The integrated K12 model to come under attack with greater specialization at pre-school and secondary and higher levels, and  New private education players to compete in unregulated but highly lucrative areas such as skill and vocational training and private coaching. Ongoing education reforms should favour a rise in the valuation multiples of incumbents …we expect private players to defocus on K-12, the attractiveness of technical education to continue and skill and vocational training to be new growth opportunities
  8. 8. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 7 Incumbents to benefit Reputed incumbent private players in the regulated verticals of education stand to benefit for two reasons.  Implementation of the ongoing legislation measures on quality improvement (accreditation, weeding out of malpractices and academic depository) are likely to help the serious, credible private players. These measures, coupled with the conditions posed by the Right to Education (RTE) Act, should also create entry barriers for the new private players. Consequently, the new players are unlikely to make large investments in the highly regulated verticals of Indian education, particularly school education. The status quo on the non- profit clause for formal education means that major potential entrants (such as eminent foreign educational institutes) are likely to further defer their entry decisions. This is likely to increase the scarcity premium for the existing private institutions, both in terms of higher fees from students and better valuation premium from investors.  The willingness of Indian households to spend money on quality education provided by reputed organisations would pose serious challenges for most unorganised/stand-alone players and new entrants. As a result, the existing large domestic private players are likely to consolidate their positions. The incumbent institutions are equipped in terms of (1) appropriate institutional structuring to utilize the regulatory arbitrage and (2) ‘managing’ the education bureaucracy for any actual/perceived departure from the public policy mandated requirements. We expect the stronger incumbents to improve market share by bringing the stand-alone or small institutions within their fold. De-focus on elementary education to alter the K-12 model Mirroring the commitment of the state to make elementary education universal, the new Right to Education Act (RTE) makes it mandatory for elementary schools (standard I-VIII) to reserve 25% seats for free education for weaker sections, with a limited measure of compensation for lost tuition fees from the government. For existing K-12 schools, legal bifurcation of the play-school from elementary and secondary education would absolve private schools of any obligation to follow RTE norms at the pre-school level. In addition, both incumbents and new entrants to private school education are likely to defocus on elementary education and concentrate on pre-schools on the one end and on secondary and higher secondary levels on the other. Private schools do not have any obligation under the RTE for secondary and higher secondary education. The proportion of students pursing secondary/higher secondary education in private schools to those undergoing elementary education is just 30%. Yet, this has risen fast – from 17% in 1996. Further, household expenditure in private schools at the secondary and higher-secondary levels is double that of the spend at the elementary level. The clauses to regulate private schools through RTE may, therefore, end up harming the noble cause for which it was enacted. Major potential entrants (such as eminent foreign educational institutes) are likely to further defer their entry decisions. This is likely to increase the scarcity premium for existing private institutions
  9. 9. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 8 Enhancing of existing strength in unregulated segments Current public policy initiatives have not put in place any incentive mechanism to attract private investment into formal education. Moreover, we expect private players to defocus on school education, a vertical that currently accounts for the largest portion (~50%) of revenue for private education providers. Consequently, we expect private investment in education to remain focused mainly in areas where it is already strong – pre-school, technical education and private tuition. We expect private initiatives on skill training and vocational education to intensify considerably. It is reported that employers find 75% of fresh engineering graduates, even those from premiere institutes, not employable without additional skill training. This situation gives much scope for private investment in this area. India has always faced serious challenges in producing sufficient skilled technicians. The strong economic growth over the last decade and the consequent increase in the demand for such skills has further increased the demand for skill training. The key problem in the area of vocational training is that the aspirants for such training lack the finance to undertake such courses. The organised financial system generally does not extend such funding due to the high transaction cost of such small loans and the lack of bankable collateral. Currently, prospective employers are coming forward to sponsor such courses, often through in-house training facilities, backed by job guarantees at the end of the training. As the scale of such training increases, this segment of the education industry is likely to see rapid growth.
  10. 10. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 9 Rising trends in education spend Household spend on education is the chief source of revenue for private education providers, as 85% of the government spend on education goes to pay salaries. Sharply rising household spend (~17% annually since ’05, and 19% expected in the next three years) is driving the demand for private education. High concentration of demand – 57% spend in urban areas and 44% by the richest 10% of population – helps private education providers focus on location strategies. Tuition fees (34% of overall household education spend) are the largest source of revenue for private players. Within this, technical /professional education is the most lucrative segment (20% of household spend with just 2.6% of total student population). However, household spend on primary education (23% household spend with 47% of total student population) is likely to reduce with the enactment of the RTE Act. Urban-centric, concentrated growth Growth in public spend is trailing growth in household spend. India’s overall education spend to GDP rose from less than 1% in the early 1950s to over 5% currently (see Fig 7). Though growth in public spend on education has accelerated since the 1990s, it is now trailing the growth in household spend (see Fig 8). Urban households account for 57% of private spend. Urban households constitute 26% of the overall population, but account for 57% of overall private expenditure on education (see Fig 9). A sizable part of the rural student population travels to urban centres to avail of tertiary educational institutes. Therefore, a large part of education spend by rural households is in urban centres. This implies that under the current situation, it is not viable for private players to make major forays into rural education. Top 10% of population accounts for 44% of household spend. Education spend, as a proportion of overall consumer spend, rises sharply with the increase in overall capacity to spend (see Fig 10). The top 10% of population, in terms of spend, accounts for 44% of the overall private spend on education. The top 20% accounts for 59% of spend. At the lowest end, the poorest 10% of the rural population spends 1.4% of their On a per capita basis, the richest 10% of the urban population spends 90 times more on education than the poorest 10% of the rural population. The main opportunity for private entrepreneurs, therefore, is in capturing students from higher- income categories Fig 7 – Education spend to GDP up from 1% to over 5% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 FY51 FY56 FY61 FY66 FY71 FY76 FY81 FY86 FY91 FY96 FY01 FY06 FY11 (EducationspendingtoGDP,%) 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 (EducationspendingtoGDP,%) Pvt. edu. spending /GDP Pub. edu. spending /GDP Overall edu. spending /GDP (RHS) Source: Central Statistical Organisation, Anand Rathi Research Fig 8 – Private spend on education accelerating since the ’70s 2 4 6 8 10 12 14 16 18 1950s 1960s 1970s 1980s 1990s 2000s 2010s (Realgrowthineducationspending,%) Pvt. edu. Spending Pub. edu. Spending Source: Central Statistical Organisation, Anand Rathi Research
  11. 11. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 10 consumer spend on education and at the highest end, the richest 10% of the urban population spends 10.3% of their consumer spend on education. On a per capita basis, the richest 10% of the urban population spends 90 times more on education than the poorest 10% of the rural population. The main opportunity for private entrepreneurs in India’s education sector, therefore, is in capturing students from higher-income categories. Consequently, revenue generation for entrepreneurs in private education lies in opening institutions in strategic locations, rather than in opening a large number of institutions. Scope of private education The not-for-profit status of formal education has led to a limited role for private educational institutes in school and general (non-technical, non- professional) higher education. Within formal education, private institutes dominate technical/professional education. Parallel education and lucrative segments in ancillary education are also areas of robust opportunity for the private sector. Technical education, the most attractive segment With just 2.6% of overall students, technical education accounts for 20% of the overall household spend on education. Yet, budgetary support to technical education accounts for just 4% of the overall budgetary support to education. Interestingly, 55% of students pursuing technical education are enrolled with private unaided institutions (see Fig 11). This is the only segment where a majority of students prefer private education. Despite the relatively small size of the segment within the formal education system, technical education seems to be the most attractive destination for private investment. To a lesser degree, vocational institutions also follow the same pattern. Technical education offers the best opportunity for private players in formal education … textbooks and coaching are niche opportunities …85% of the public spend on education goes to pay salaries, so private investment in education mostly depends on household spend Fig 9 – Top 20% accounts for 60% of pvt. education spend 0 3 6 9 12 15 18 21 24 0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 (Fractile class by consumer spending) (Shareintotalpvt.edu.spend,%) Rural Urban Source: National Sample Survey Organisation and Anand Rathi Research Fig 10 – Sharp rise in education spend with affordability 1 2 3 4 5 6 7 8 9 10 11 0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 (Fractile class by consumer spending) (Edu.spendintotalpvt.spending,%) Rural Urban Source: National Sample Survey Organisation and Anand Rathi Research
  12. 12. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 11 Fig 11 – Over 50% students of technical education go to private colleges 66 64 55 51 22 34 61 24 21 24 20 55 47 24 0 10 20 30 40 50 60 70 80 90 100 Primary Middle S & HS Above HS general Technical Vocational All (ShareinNo.ofstudents,%) Govt Local body Pvt. Aided Pvt. Un-aided NR Source: National Sample Survey Organisation, Anand Rathi Research; Note: NR stands for not reported Tuition fee the biggest opportunity at 34% of household spend Tuition fee is the single largest component of private expenditure on education and accounts for 34% of overall expenditure. Over one-third of total tuition fee is spent on technical education (see Fig 12). Of the total private expenditure on technical education, 58% is on tuition fees (see Fig 13). Of the total private spend on tuition fee, 62% goes to private institutions (see Fig 14). Fig 12 – Purpose-wise utilization of private spend on education Tuition fee Exam fee Books etc. Uniform Transport Private coaching Others Total (By segment of education, %) Primary 6.9 3.1 4.6 3.3 2.0 1.8 0.9 22.6 Middle 4.2 2.0 4.0 2.4 1.2 2.4 0.7 16.7 Secondary & HS 6.7 3.7 6.1 2.5 1.9 5.7 1.1 27.8 Above HS 3.8 2.1 2.3 0.2 1.4 1.1 0.5 11.6 Technical/professional 11.6 3.8 2.1 0.3 1.2 0.5 0.6 20.0 Vocational 0.6 0.3 0.1 0.0 0.1 0.0 0.0 1.2 Total 33.8 15.0 19.2 8.8 7.8 11.6 3.8 100.0 (By school management type, %) Govt./local body 4.3 4.3 9.0 4.3 1.9 5.5 1.6 30.9 Pvt. aided 8.2 3.7 3.7 1.5 1.9 2.8 0.8 22.5 Pvt. un-aided 20.9 6.9 6.3 2.9 4.0 3.1 1.4 45.4 NR 0.5 0.1 0.2 0.1 0.1 0.1 0.0 1.1 Total 33.8 15.0 19.2 8.8 7.8 11.6 3.8 100.0 Source: NSSO & ARR The per head tuition fee at various segments and types of institutions show several trends, which include the following:  Tuition fees go up progressively in general education as the level of education rises. The maximum jump happens between higher secondary (HS) and above HS level.  For similar types of educational institutions (government, private- aided, private non-aided) tuition fees for technical education are four times higher, at the minimum, than for general education. For government-owned education institutions, the fees are ~30 times higher.  Comparing similar levels of education, tuition fees are always higher in urban areas compared to rural areas. Tuition fees for technical education are four times higher than for general education
  13. 13. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 12  In the case of general education, tuition fees for private-aided and non-aided institutions are 4.5 times and 8 times higher, respectively, than for government institutions. In the case of technical education, the percentage dispersion is far lower – tuition fees for private-aided and non-aided institutions are 2 times and 2.5 times higher, respectively, than government institutions.  Tuition fees, at a similar level of education, are always higher for boys than for girls. Books (19% of spend) and coaching (12%) are lucrative niches Next to tuition fees, spend on books and stationary, at 19%, is the second- largest component of total household spend on education. Spend on books is largely associated with school education, particularly secondary and HS level. In per head terms, spend on books increases 30-100% as a student progresses from primary to middle, to secondary & HS and above HS. The large market size and considerable per head spend, however, make secondary and HS the most lucrative part of the textbook market. Private coaching accounts for 12% of household spend on education. Interestingly, unlike tuition fees and books, where the per head spend by students studying at private non-aided schools is the highest, in the case of private coaching, students of private-aided schools spend the most. At 50% of the total spend on private coaching, secondary and HS levels are the most lucrative. Catering to public spend offers limited growth potential Several private institutions in education, especially from the ancillary segment, cater to public educational institutions.7 Yet, the scope of catering to public spend is not very large, since over 50% of overall public funding on education and 85% of such funds, excluding transfers (for instance, to schools owned by corporations, municipalities and private- aided schools), goes to paying staff salaries (see Fig 15). Therefore, private investment in education largely caters to private educational institutes. Fig 13 – Tuition fees account for 24-58% of household spend 30 25 24 33 58 49 34 0 10 20 30 40 50 60 70 80 90 100 Primary Middle Secd. & HS Above HS Technical Vocational Total (Shareinprivatespending,%) Tuition fee Exam fee, etc. Books etc. Uniform Transport Private coaching Others Source: NSSO, Anand Rathi Research Fig 14 –Highest spend by public school students on coaching 13 29 47 49 24 48 42 31 62 46 33 33 51 27 36 45 0 10 20 30 40 50 60 70 80 90 100 Tuition fee Exam fee, etc. Books etc. Uniform Transport Private coaching Others Total (Shareinprivatespending,%) Govt/Local body Pvt. Aided Pvt. Un-aided Others Source: NSSO, Anand Rathi Research
  14. 14. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 13 Fig 15 – About 85% of public education spend is on salaries (excl. transfers) 45 50 55 60 65 70 75 80 85 90 FY05 FY06 FY07 FY08 FY09 FY10 (Employeecomp.topublicedu.spending,%) Compensation of employees to total spend Compensation of employees to total spend net transfers Source: Central Statistical Organisation, Anand Rathi Research RTE limits the potential of primary education With 47% of the total student population studying in primary schools, 50% of the government’s (Centre and states, together) budgetary allocation on education is directed towards to this segment. Primary education, however, receives a much lower proportion (23%) of household spend on education. Though only 24% of primary students attend private schools, expenditure by households on such students accounts for 60% of the overall household spend on primary education (see Fig 16). The large student strength, substantial budgetary allocation and considerable household spend make primary education an attractive niche for private entrepreneurs. However, enactment of the RTE Act (which makes it mandatory for schools to reserve 25% of seats for weaker sections of society) has substantially reduced the attractiveness of primary education for private entrepreneurs. (See subsequent chapter: ‘Public Policy: The Good, Bad & Ugly’.) Fig 16 – Composition of students and private spending on education Primary Middle Secondary & Higher Secondary Above Higher Secondary General Technical Vocational All Students (share, %) Government 31.0 15.7 10.8 2.9 0.6 0.1 61.1 Local body 2.2 1.1 0.5 0.0 - - 3.9 Pvt. aided 2.6 2.5 3.6 1.5 0.6 0.0 10.8 Pvt. un-aided 11.1 5.2 4.7 1.2 1.4 0.1 23.7 NR 0.2 0.1 0.1 0.1 0.0 0.0 0.6 Total 47.1 24.6 19.8 5.7 2.6 0.2 100.0 Private spending on education (share, %) Government 5.1 5.6 9.8 5.4 3.4 0.2 29.5 Local body 0.5 0.4 0.5 0.1 - - 1.5 Pvt. aided 3.2 2.9 6.7 3.4 6.1 0.2 22.5 Pvt. un-aided 13.6 7.7 10.5 2.5 10.3 0.8 45.4 NR 0.3 0.2 0.3 0.2 0.2 0.0 1.2 Total 22.7 16.7 27.8 11.6 20.0 1.2 100.0 Source: NSSO & ARR. Share of private education in household spend tops in primary level The share of students enrolling in private institutions in the general stream above primary education, as a percentage of overall student strength in the respective segments, is 20-24%, which is lower than the primary level (see Fig 11). The share of private education in household spend actually
  15. 15. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 14 declines from 60% for primary to 46% at middle school, 38% in secondary and HS and 22% post HS general education. This, combined with the progressive reduction of student strength in higher education, makes these verticals less interesting for private investment.
  16. 16. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 15 Pre-schools: Legally for-profit Pre-schools are outside the official formal educational system and there is little government spend on this segment. This enables private entrepreneurs to legally operate pre-schools for profit. Rising urbanization, the increasing proportion of women joining the workforce, rising aspirations for quality education for offspring, and affordability are factors driving the strong growth in this segment. High growth, low entry barriers, low-funding requirements and the virtual absence of public policy restrictions make this segment attractive. We estimate private revenue in the pre-school segment at US$2bn in 2012 and US$2.9bn in 2015. RTE norms are expected to tilt the balance in favour of pure pre-school and against integrated pre-schools with K-12. Strong growth, low funding requirements According to World Bank data, the size of the pre-school segment in India was about US$1.3bn in 2005. Industry estimates compounded annualised growth rate (CAGR) for the segment at ~35%. We estimate the segment size at US$2bn in 2012 and US$2.9bn in 2015 (see Fig 17). Pre-schools lay the foundation for formal education. They typically cater to the age group of 1-4 years and may also offer nursery, junior kindergarten and senior kindergarten classes. Rising urbanization, increased proportion of women joining the workforce, rising aspirations for quality education for offspring and improved affordability are factors driving the strong growth in this segment. High growth, low entry barriers, low-funding requirements and the virtual absence of public policy restrictions – including the policy relating to non-for- profit status – make this segment attractive to investors. With low capital requirement, pre-schools possess a scaleable model, especially with regard to franchises. Fig 17 – Pre-school: market-size estimation 2010 2015 Population (1-4 years, '000) Urban 38,268 39,818 Rural 90,316 87,080 Pre-school enrolment (%) Urban 25 33 Rural 5 5 Fees (`/year) Urban 9,000 9,600 Rural 2,400 2,640 Revenue (`bn) 97 138 Revenue (US$m) 2.0 2.9 Source: United Nations Population Statistics, Anand Rathi Research Focus on K-12 admission helps increase fees Unorganized neighbourhood institutions currently dominate the pre- school segment. However, this situation is changing: 11 major playschool chains and about 10 smaller organized players are making strong headway in the segment (Anonymous, 2011). The virtual absence of public policy restrictions – such as the policy relating to non-for-profit status – makes this segment attractive to investors
  17. 17. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 16 Fees charged by pre-schools depend on the spending power of the local area in which they operate. Two hours of playschool activity fees may be anywhere between `1,000-12,000/- per month in the major cities (see Fig 18). The amount is much lower in smaller towns. The revenue-expenditure streams for pre-schools in India are presented in Fig 19. Most parents enrol their children in play schools when they are a year old, to meet the challenges of the entrance interview for admission to the K-12 school of their choice.8 Preparing students for interviews for admission into reputable K-12 schools has become a key selling idea to enrol kids for play schools. Cashing in on this opportunity, several schools, particularly the new K-12 schools, have now started their own play schools. In areas where the elementary/K-12 is at a distance from the city area, parents tend to send their children to nearby pre-schools. Fig 18 – Pre-school: annual revenue estimation Premium school in metros Mid-segment school in metros Tier-II towns Admission fee (`) 10,000 3,000 1500 Annual tuition fee (`) 72,000 27,000 15,000 Other revenue (uniform, books etc) (`) 7,000 5,000 2,000 Average capacity of a pre-school 80 160 120 Annual revenue of a pre-school (`m) 7.1 5.6 2.2 Source: Anand Rathi Research Fig 19 – Revenue / expenditure stream for pre-schools Pre-school Revenue Expenditure Admission Fee AccessoriesTution Fee Day Care Teacher Training Lease / Rent Staff Salary Supplier Cost Misc. Expenses Source: Anand Rathi Research Business model for pre-schools Being predominantly neighbourhood institutions, pre-schools address a micro market and are driven by local conditions. Individual pre-schools, therefore, require low capital as compared to other educational institutes. In addition, no education board regulates these schools. However, branding and an internal set of teaching structures are increasingly becoming mandatory due to the increasing demands of parents. This, in turn, has thrown up a huge opportunity for organized players that have the resources to open multiple centres. There are many models of operations in the pre-school segment. The key models are: owned and franchisee. For example, Kidzee (part of Zee Learn) follows a predominantly franchisee model, while Tree House, another major pre-school player, has 70-75% own centres. The business models of the major organized pre-school players are presented in Fig 20. Franchisee models offer faster scalability, as the content is ready and there is no incremental cost to the franchisor in terms of manpower capital investment. In most cases, royalty and the license fees received have 80-85% EBITDA margin. The franchisor’s only major expense is on advertisements.
  18. 18. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 17 This model, however, comes with its own challenges, including dilution of quality of teaching, cash leakage for the franchisor in terms of numbers that are reported for royalty and the high churn rate among local partners, as the business has a payback of 3-4 years. Some of these can be addressed by selecting proper partners and regular monitoring by the franchisor. Financial models for pre-schools Both at the EBITDA and at PAT levels, the own-school model is less profitable than the franchisor model. However, the own-school model provides greater quality control and cash flow certainty. Greater capital expenditure requirement under the own-school model, however, makes the franchisee model more scaleable. Fig. 21 provides the unit level comparison for pre-schools operating in various market segments under both franchisee- and owned-models at a steady state of operations with optimum capacity utilized. Fig. 22 provides a similar financial model for the franchisor. Better profit margins are earned by opening own outlets than by being a franchisee. In the case of the franchisee, he has to pay for the ongoing royalty and has to also incur higher capital expenditure as license fees paid to franchisor is taken as a part of capital expenditure/sunk cost. Yet, access to better course structure, teacher training and, perhaps most importantly, a better-known brand name is tilting the preference in favour of franchisee models versus the stand-alone neighbourhood school. Fig 20 – Business models of the key pre-school players Euro Kids Kidzee Tree House Kangaroo Kids Apple Kids Type of model ~90% franchisee ~95-99% franchisee 65-70% owned ~94% franchisee Region pan-India pan-India western India pan-India South-India Total centres 841 758 238 80 200+ Total students 43,732 45,000 13,090 3,600 13,462 Avg. fees (`'000 / p.a) 15-45 12-40 15-40 60-100 25-40 Source: Industry, Anand Rathi Research Fig 21 – Pre-school unit-level matrix for own / franchisee schools Own schools Franchisee schools (`m) Premium school in metro Mid-segment school in metro Tier-II town Premium school in metro Mid-segment school in metro Tier-II town Revenues – pre-school (Fig.18) 7.1 5.6 2.2 7.1 5.6 2.2 Other activities 1.9 2.9 1.4 1.9 2.9 1.4 Total revenues 9.0 8.5 3.7 9.0 8.5 3.7 Staff salary 0.7 1.3 0.5 0.7 1.3 0.5 Lease rent (roughly 20-25% of sales) 2.3 1.7 0.7 2.3 1.7 0.7 Content 0.1 0.1 0.1 0.1 0.1 0.1 SG&A 0.5 0.4 0.2 0.2 0.2 0.1 Royalty to franchisor (10-15%) - - - 1.4 1.3 0.4 EBITDA 5.6 4.9 2.2 4.4 3.9 1.9 EBITDA margins (%) 61.7 58.2 60.2 49.2 45.7 52.7 Depreciation 1.0 1.0 0.6 1.4 1.4 0.8 PBT 4.6 3.9 1.6 3.0 2.5 1.2 Tax 1.4 1.2 0.5 0.9 0.8 0.4 PAT 3.2 2.7 1.1 2.1 1.7 0.8 PAT margins (%) 34.9 32.0 30.3 23.2 20.1 22.1 One-time license fees - - - 2.0 2.0 0.8 CAPEX 5.0 5.0 3.0 5.0 5.0 3.0 ROI (%) 63.1 54.3 36.9 30.0 24.4 21.3 Source: Industry, Anand Rathi Research
  19. 19. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 18 From the franchisor’s point of view, each incremental unit that is franchised helps substantially increase its margins, as on a specific unit there is very limited cost incurred. The franchisor enjoys anywhere between 74-85% EBITDA margins on all centres that are franchised. This calculation captures only the annual inflows without considering the one- time licensee fees that the franchisor receives at the beginning of the franchisee tenure. Fig 22 – Pre-school: unit-level matrix for the franchisor (`m) Income for franchisor Premium school in metros Mid-segment school in metros Tier-II towns Royalty revenues (Fig. 21) 1.36 1.27 0.37 Content 0.02 0.05 0.04 Teacher training 0.03 0.07 0.02 SG&A 0.14 0.13 0.04 EBITDA / PBT 1.16 1.03 0.27 EBITDA margins (%) 85.75 80.94 73.61 Tax 0.36 0.32 0.08 PAT 0.80 0.71 0.19 PAT margins (%) 59.17 55.85 50.79 Source: Industry, Anand Rathi Research RTE Act to boost the pure pre-school model The RTE Act mandates that private pre-schools providing elementary education (standard I-VIII), need to admit 25% of the students from the weaker sections and disadvantaged groups and provide them free education. This provision, however, would not be applicable for pre- schools that are not part of an institute that offers elementary education. Therefore, private pure pre-schools stand to benefit from this development. The basic strengths and weaknesses of the pre-school model have been tabulated in Fig 23. Fig 23 – Porter’s five forces Porter’s five forces Degree of threat Remarks Bargaining power of buyers Low Demand outnumbers supply by huge margin and hence clients (students / parents) have very little say. Bargaining power of suppliers Medium Getting quality teachers is difficult. This is addressed by teacher training programmes and technological aids Threat of substitutes Low to medium The trend towards quality / branded pre-schools is picking up. However, the high fees charged in such schools allow local mom & pop shops to co-exist. K- 12 schools, starting with pre-schools in the same premises, also pose some threat. Threat of new entrants Medium to high Launching a pre-school is easy as it requires low investment, no regulatory issues are involved and content requirement is generally basic. These schools can pull clients, as it is a localized market. New entrants, however, face issues with regard to establishing their reputation. Industry competitors Medium to high Most players want to have a pre-school chain to provide students as feeders for the K-12 institutes. Source: Anand Rathi Research
  20. 20. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 19 K-12: large spend, highly regulated While the size of spend in this sector is around US$75bn per year, the predominant part of this comprises public spend. We estimate revenues for private players in the K-12 segment at US$15bn in 2012 and US$20bn in 2015. The RTE requires private schools to offer 25% of seats free to weaker sections and disadvantaged groups. This coupled with stringent and unequal penal provisions – such as compulsory closure for private schools (vs. public schools) that do not meet RTE norms – is likely to deter fresh private investment in the segment. K-12 education K-12 is the most regulated segment of India’s education sector. India has an elaborate structure for K-12 education (see Fig. 24). While the size of spending in this sector is around US$75bn per year, the predominant part of this is public spend. The opportunities for private players in this segment are valued at around US$15bn and witness a CAGR of 15%. In addition to the not-for-profit clause, private schools also face the RTE Act mandate that requires 25% of seats to be given free to students from weaker sections and disadvantaged groups. Despite the non-profit clause, 24% of the primary (standard I-IV), 21% of middle (standard V-VIII) and 24% of the secondary and higher secondary (standard IX to XII) students attend private schools. This percentage has been increasing over the years (see Fig 25). The RTE also mandates closure of private schools if they do not meet the stipulated conditions on teaching and physical infrastructure. Moreover, public policy at the state level is now focussed on controlling the fee structure in private schools.8 Such public policy stances are unlikely to induce large private investment in the sector, especially from serious educational enterprises. Given that education is a state subject, each state has different laws for K- 12 schools. The basic requirement of not-for-profit operations is common in all states. However, private players have moved around the Act to create various structures that indirectly generate profit in K-12 schools. Fig 24 – K-12 schools: management structure Structure by management K-12 Education Government Private aided Private unaided Central schools State schools Kendriya Vidyalaya Sainik schools Navodaya schools Municipal schools District schools Village schools Source: Anand Rathi Research. Fig 25 – More school students joining private schools 0 4 8 12 16 20 24 Primary Middle Secondary and higher secondary (Proportionofstudentsattendingpvt.school,%) 1996 2008 2012 Source: NSSO, Anand Rathi Research The over-regulated K-12 industry segment is likely to deter new, serious, and credible private sector players from entering the field. The RTE norms have put an unequal burden on private schools (vs public schools), which should lead to changes in the business model
  21. 21. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 20 Asset-heavy business model In the case of an asset-heavy model, apart from establishing a school as a trust/society/section 25 company, the private education company creates two separate companies, namely an infrastructure company and a management company. The infrastructure company has all the assets – i.e. land, building, furniture – and provides the same to the trust on a long- term lease basis. The management company provides the trust with services such as content, accessories and teacher training and, in turn, charges fees. These contracts are generally long-term – a minimum of 30 years – if not, getting affiliation from boards could become difficult. In this model, the trust hires the teachers and provides salary and other local miscellaneous expenses. Revenue is initially recorded in the books of the trust and is transferred to companies by way of lease rent and management fees (see Fig 26). Under the asset-heavy model, a K-12 school becomes cash-flow positive in at least 5-6 years. It takes even longer – 10- 12 years – for the school to reach maximum capacity. High capex, with a long gestation period for payback, and issues related to acquisition of land make it difficult to ramp up several schools simultaneously. On an average, to set up a medium quality school in a tier-I city requires `200-250m for capex and working capital. Fig 26 – Asset-heavy K-12 model Management company School trust Infra company Management Fees Land & Building Lease & Rent Consulting / Content Holding company Source: Anand Rathi Research Dry management – Asset-light business model The long gestation period, coupled with substantial upfront capex requirement, under the asset-heavy model, led some private education players to approach local partners that have the ability to invest in infrastructure and are keen in being involved in the sector. The private player manages the operations of the school and gets management fees in turn (see Fig 27). Several existing schools also give away management contracts to various private players. Fig 27 – Asset-light K-12 model Management company School trust Local partner Consulting Royalty / Management fee Land & Building Lease & Rent Source: Anand Rathi Research
  22. 22. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 21 Other variations exist. For example, certain private education providers tie up with real estate developers. The developer builds school buildings in and around large residential projects and private education providers create a trust/society school, taking the property on lease. Infrastructure and management is provided to such schools by separate entities created by the private player. There some examples of schools set up through public-private partnership (PPP). Under this model, the public sector entity provides the land at a concession and, in return, the private school provides free education to a predetermined proportion of students under conditions set out by the public sector entity. The revenue-expenditure model and branch network of major K-12 chains are presented in Fig 28 and Fig 29, respectively. Basic strengths and weaknesses of the private K-12 institutions are presented in Fig 30. Fig 31 provides brief details on some of the major private players in the K-12 segment. The revenue-expenditure model of a typical K-12 school from inception until the twelfth year is presented in Fig 32. Fig 28 – Revenue-expenditure model of K-12 Schools (K12) Revenue Expenditure Admission fee Donations Tution fee Other Extracurricular activities Books Hostel Bus Canteen Uniform Lease / Rent Salary & welfare Electricity SG&A Capital expenditure Teaching staff Non teaching staff Furniture Equipment Operating expenditure Source: Anand Rathi Research RTE to lead to defocusing on K-12 by private players The RTE Act requires that for elementary education (standard I-VIII), private schools offer 25% of the seats free to weaker sections and disadvantaged groups. The government would reimburse private schools for this. We estimate such reimbursements to be `.3,600 per student per year. Our estimates suggest that such reimbursement would be considerably revenue decretive for the private schools (See details in Annex I). Moreover, the Act puts severe teaching and non-teaching infrastructure requirements on private schools, failing which they would face steep penalties and even compulsory closure. Incidentally, for similar transgressions, public schools would not face any specific and time-bound penalty. Such measures are likely to deter fresh private investment in the segment. Even the existing players are likely to switch from the asset- heavy to the asset-light model. Further regulation in tuition fees in a few states (Tamil Nadu and Maharashtra) will only add to the problems of private players.
  23. 23. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 22 Digital content causing competition to scale up Providing of multimedia content to private schools was a trend initially started by Educomp, which is a pioneer in digitizing content for sale to private schools. Over the years, the provision of such services has been seen as an aid to make an inroad into the supply system of the various schools and colleges in order to supply other goods and services. However, the success of Educomp’s Smart Classes has prompted the competition to scale up operations (that were initially very small). More than six players have entered this segment and are in direct competition to Educomp. We believe that though there is a big market for selling content in schools, the same is slowly becoming a commodity, with almost all the players providing a similar type of service – the key differentiator being the pricing. A recent trend is for schools to invest in hardware on their own and to offer extra perks, both monetary as well as non-monetary, to teachers in order to create digital content in-house. However, this is not on par with what organized players are offering. Being proprietary, the content can be upgraded at regular intervals and used in all classes, unlike in the case of paid content, which is currently used only for select classes. Fig 29 – Company-wise rate per class for ICT (`) Company Product Price per class room/ per month Educomp Smart Class 10,000 Mexus Education IKEN 5,000 Next Education TeachNext 6,500 Pearson / Edurite DigiClass 5,000 HCL digischool 5,000 Tata Interactive systems CLASSEDGE 8,800 Everonn iSchools 7,000 NIIT nGuru 8,000 Source: Companies Fig 30 – Porter’s five forces Porter’s five forces Degree of threat Remarks Bargaining power of buyers Low Limited number of K-12 schools with an even lower number of private schools, which are generally perceived to be of superior quality, leaves limited option for students. Bargaining power of suppliers Medium Scarcity of teachers is acute. This is addressed by moving to the "teacher-assisted model" from the old "teacher-led" model. Threat of substitutes Low With poor quality of government schools and increasing awareness among parents regarding the merits of imparting quality education, the market share of private schools is increasing rapidly. Threat of new entrants Low to medium High investment, long gestation periods with back- ended returns and regulatory issues act as barriers for new entrants. The conditions that private schools have to meet under the RTE Act are likely to further reduce competition. Industry competitors Low to medium Demand for quality education is too high to be met by the current private players in the industry. However, with the considerable increase in high-end private schools in various metros and tier-I towns, the competition among the private schools may intensify in some of the micro markets. Source: Anand Rathi Research
  24. 24. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 23 Fig 31 – Salient features of select major K-12 players Name No. of schools Description Bharatiya Vidya Bhavan's Schools 30 They run around 30 schools across India, many are run in association with third parties. They also run an Indian Central School in Singapore Billabong Schools 57 Part of the Kangaroo Kids group Delhi Public Schools 130 One of the most prominent and largest K-12 players Gems Education 60 52 schools across the globe and eight in India, has acquired stake in Everonn Indus World Schools 17 Operates schools across India K-12 Techno Services 70 Owns management rights for a number of K12 schools. Part of the Gowthan Educational Institutions KidZee High & Mount Litera Zee schools 20 Part of Zee Learn, operates across India People Combine 4 Mainly in AP, provides a range of IB, GCSE and CBSE education. Radcliffe schools 33 Operates schools across India Ryan International 115 Large player, is now expanding overseas Spring Dales 4 Focus on North India The Millennium schools 86 Own/dry management schools affiliated with - IB / IGCSE / CBSE and ICSE boards. Part of Educomp Treehouse 16 Concentrated in Gujarat and Maharashtra VIBGYOR 10 Operates schools mainly in and around Mumbai Witty International 5 ICSE/ CBSE / IB/ IGCSE boards. Two schools in Mumbai; one in Udaipur Source: Companies, Anand Rathi Research
  25. 25. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 24 Fig 32 – Unit-level matrix for K-12 institution from inception up to 12 years Yrs 1 2 3 4 5 6 7 8 9 10 11 12 Grade Nursery- IV Nursery- V Nursery- VI Nursery- VII Nursery- VIII Nursery- IX Nursery- X Nursery- XI Nursery- XII Nursery- XII Nursery- XII Total capacity Nos. 1,120 1,280 1,440 1,600 1,760 1,920 2,080 2,240 2,400 2,400 2,400 Capacity utilization % 25 35 45 55 65 75 85 90 95 100 100 Students on roll Nos. 280 448 648 880 1,144 1,440 1,768 2,016 2,280 2,400 2,400 New students Nos. 280 168 200 232 264 296 328 248 264 120 - Fresh students in nursery Nos. - - - - - - - - - - 160 Total new students Nos. 280 168 200 232 264 296 328 248 264 120 160 Tuition fees `(pm) 2,500 2,750 3,025 3,328 3,660 4,026 4,429 4,872 5,359 5,895 6,484 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Admission fees (one time) ` 20,000 20,000 20,000 25,000 25,000 25,000 30,000 30,000 30,000 30,000 30,000 Other misc. fees ` 2,500 2,750 3,025 3,328 3,660 4,026 4,429 4,872 5,359 5,895 6,484 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Tuition fees `m 8.4 14.8 23.5 35.1 50.2 69.6 94.0 117.9 146.6 169.8 186.7 Admission fees `m 5.6 3.4 4.0 5.8 6.6 7.4 9.8 7.4 7.9 3.6 4.8 Other misc. Fees `m 0.7 1.2 2.0 2.9 4.2 5.8 7.8 9.8 12.2 14.1 15.6 Total revenue `m 15 19 29 44 61 83 112 135 167 188 207 Teaching (1:25) Nos 11 18 26 35 46 58 71 81 91 96 96 Avg. salary of teaching staff ` 15,000 16,500 18,150 19,965 21,962 24,158 26,573 29,231 32,154 35,369 38,906 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Teaching staff salary `m 2 4 6 9 13 18 25 31 38 44 49 Non-teaching staff Nos 9 15 22 22 29 36 44 50 57 60 60 Avg. salary of non-teaching staff ` 12,000 13,200 14,520 15,972 17,569 19,326 21,259 23,385 25,723 28,295 31,125 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Non-teaching staff salary `m 1 3 4 5 7 9 12 15 19 22 24 Total employee cost `m 4 6 10 14 20 27 37 46 57 66 73 As % of revenue % 24.1 33.2 34.9 31.1 32.4 32.9 32.9 34.0 34.2 35.3 35.2 Other operating cost `m 7 7 9 13 18 25 33 37 46 52 57 As % of revenue % 45.0% 35.0% 30.0% 30.0% 30.0% 30.0% 30.0% 27.5% 27.5% 27.5% 27.5% Total cost `m 10 13 19 27 38 52 70 83 103 118 130 EBITDA `m 5 6 10 17 23 31 41 52 64 70 77 Margins % 30.9 31.8 35.1 38.9 37.6 37.1 37.1 38.5 38.3 37.2 37.3 Depreciation `m 4.3 4.8 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Interest @ 12% `m 11.1 13.8 14.7 15.0 15.0 14.6 13.3 10.9 7.8 - - PBT `m (10.8) (12.4) (9.3) (2.9) 3.0 11.1 23.2 36.1 51.0 64.7 72.3 Tax @ 33% `m - - - - - - 0.6 11.9 16.8 21.4 23.9 PAT `m (10.8) (12.4) (9.3) (2.9) 3.0 11.1 22.6 24.2 34.1 43.4 48.5 PAT margins % - - - - 4.9 13.4 20.2 17.9 20.5 23.1 23.4 Capex `m 150 20 20 10 Depreciation `m 4 5 5 5 5 5 5 5 5 5 5 Net block `m 150 166 181 186 181 176 171 166 161 156 151 146 WC loan `m 50 Loan (debt : equity - 1:1) `m 75 110 120 125 125 125 117.8 103.3 78.5 52.2 17.0 - ROE % (8.7) (9.9) (7.5) (2.4) 2.4 8.9 18.1 19.3 27.3 34.7 38.8 ROCE % 0.1 0.3 1.4 3.5 6.0 8.7 12.4 16.7 21.2 24.7 27.4 Please note the basic assumptions 1. Land is purchased and construction started in year 1 and then the same is done phase-wise on a need basis. 2. As per CBSE / ICSE norms affiliation can be applied for only after running the school for a minimum of four years. 3. Class VIII onwards cannot be started unless affiliation is granted. 4. Assumed 40 students per class with an average of four divisions per standard as installed capacity 5. Non-teaching staff is in the ratio of 1:30 for the first 6yrs, when the maximum students are from Nursery-IV; later the ratio tilts to 1:40 6. After the 10th year, it becomes a steady state annuity model 7. We assume the trust will not reinvest and hence will not get tax benefits. If the trust reinvests, it is bound to get significant tax breaks. Source: Companies, Anand Rathi Research
  26. 26. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 25 Higher education: Capex heavy Higher education, especially technical education, has been attracting large private investment since 2005. Private opportunity in technical education is US$7bn in 2012 and is set to grow to US$12bn by 2015. General (non-technical) higher education offers private education opportunity of US$1.5bn in 2012 and this is set to grow to an estimated US$2bn by 2015. Legislative measures to strengthen accreditation, guard against malpractices and set up an academic depository are likely to help the stronger incumbents. Eminent foreign education providers are unlikely to make a large entry in the segment as long as the non-profit tag remains attached to formal education. This should also contain competition and further help the incumbents. Strong opportunity in technical education The total spend in this segment is around US$9bn per year for general (non-technical) higher education and US$10bn per year for technical/ professional education. Within this, opportunities for private education providers for general higher education are around US$1.5bn and around US$7bn for technical/professional education. For general higher education, business opportunities for the private sector are growing at a CAGR of 12.5% and at 20% CAGR for technical/professional education. Like K-12, higher education also entails front-loaded capex and back ended returns. Apart from getting recognized with a board of education (in this case a university / AICTE) a college/deemed university also needs to follow the local state-specific rules. Regulations for higher education are much clearer than that for K-12 (see Fig 33). Some states require the land and/or building to be in the name of the trust, especially in the case of universities, while others have granted approvals even if contracts are signed for a long-term lease agreement between the property owner and the trust. However, the lease agreement needs to be at least for 30-40 years. Type of business models – distance vs. class room The classroom-based higher education model is capex-heavy, as it has various infrastructure and staff requirements. Distance education is asset- light and has a wider reach, with local partners operating as selling agents as well as conducting examinations. The salient features of classroom- based and distance learning models for higher education are presented in Fig 34. Fig 35 provides the major facets of the current system of higher education in India from the perspective of private education. Fig 36 provides salient details on some of the major private players in higher education. A stylised revenue-expenditure model for college education is presented in Fig 37. Technical education to remain the focus of private players. Continuation of the non-profit clause likely to deter the entry of serious foreign players
  27. 27. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 26 Fig 33 – Basic business model for distance learning university UGC University trust LC Student Corporate entity Provides infrastructure at local area Local faculty support for counseling & tutoring Supports placements Creates awareness Appoints LCs Develops content Supports admission process Mails course material Supports in hiring faculty Supports student placements Defines eligibility Defines curriculum Approves course material Approves programs with appropriate certification i.e. diplomas, degrees e.g. BSE (IT), B.Com Admits students Conducts exams Awards degrees Service Payments Source: Anand Rathi Research Fig 34 – Features of classroom vs. distant learning model in higher education Parameters Classroom based Distance learning Investments High capex with working capital requirement, until optimum capacity is reached. Usually takes 8-9 years for pay back Limited capex to the extent of content creation and negligible working capital requirement Enrollments Capacity limited to the extent of availability of appropriate infrastructure. More of an arithmetic flow as seats increase gradually. Reach is limited to the location of the campus. No limit on enrollments Staff Teaching faculty is the biggest staff pool required. Availability of this is a big issue. Content creators, examiners and marketing staff are required. Preference Preferred for under-graduation level courses and where full-time attendance is required – such as courses involving practicals, MBA and other technical courses. Preferred to enhance skills especially with professionals with full-time work. For example, finance courses. Returns Takes 7-8 years to get returns on investment. However, post this the returns are sustainable. Operationally profitable from the first year. However, returns are more volatile as the number of students may vary widely from year to year. Source: Anand Rathi Research Fig 35 – Porter’s five forces Porter’s five forces Degree of threat Remarks Bargaining power of buyers Low Limited seats in colleges Bargaining power of suppliers Medium to high Very few qualified teachers available. This is addressed by providing distance learning courses. Threat of substitutes Low Govt. colleges / universities are not able to handle the current demand and hence are slowly opening up the sector with deemed universities. Threat of new entrants Low to medium High investment, long gestation period with back- ended returns and regulatory issues keeps new entrants at bay. Industry competitors Medium Demand too high to be met by current players in the industry. However, in streams like engineering and MBA stiff competition exists, with most students keen on reliable names that provide placements. Source: Anand Rathi Research
  28. 28. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 27 Fig 36 – Salient features of select major private players in higher education Company Location / main campus Model of operation Streams Est. number of students Amity University Noida, NCR Private University Diversified > 50,000 Bharatiya Vidya Bhavan Trust Mumbai, Maharashtra Colleges, Polytechnics in India and abroad Engineering, Management, Others NA ICFAI Hyderabad, AP Private University, Colleges, Certification programmers Management, Others > 10,000 Lovely Professional University Phagwara, Punjab Private University Diversified 24,000 on-campus Manipal Education Group Manipal, Karnataka Private Universities, Vocational, Education, E- learning, Overseas Universities Engineering, Medicine, Financial Services training, Others Over 18,000 on- campus, and 100,000 in distance education Symbiosis International University Pune, Maharashtra Private University Diversified >15,000 VIT University Vellore, Tamil Nadu Private University Engineering, Management, Others >12,000 Source: Industry, Anand Rathi Research Fig 37 – P&L model for a college in a Tier-II town Yrs 1 2 3 4 5 6 7 8 9 Total capacity Nos. 300 600 900 1,200 1,500 1,800 2,100 2,400 Capacity utilization % 60 70 80 90 90 100 100 100 Students on roll Nos. 180 420 720 1,080 1,350 1,800 2,100 2,400 Average fees ` 40,000 44,000 48,400 53,240 58,564 64,420 70,862 77,949 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Total revenue `m 7 18 35 57 79 116 149 187 Growth % 156.7 88.6 65.0 37.5 46.7 28.3 25.7 Teaching (1:20) Nos 9 21 36 54 68 90 105 120 Avg. salary of teaching staff ` 18,000 19,800 21,780 23,958 26,354 28,989 31,888 35,077 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Teaching staff salary `m 2 5 10 17 23 34 44 55 Non-teaching Nos 5 12 21 24 30 40 47 53 Avg. salary of non-teaching staff ` 12,000 13,200 14,520 15,972 17,569 19,326 21,259 23,385 Growth % 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Non-teaching staff salary `m 1 2 4 5 7 10 13 16 Total employee cost `m 3 7 14 22 30 44 57 71 As a % of revenue % 40.1 40.4 40.6 37.9 38.1 37.9 38.0 37.9 Other operating cost `m 3 6 10 14 20 26 33 42 As a % of revenue % 40.0% 35.0% 30.0% 25.0% 25.0% 22.5% 22.5% 22.5% Total cost `m 6 14 25 36 50 70 90 113 EBITDA `m 1 5 10 21 29 46 59 74 Margins % 19.9 24.6 29.4 37.1 36.9 39.6 39.5 39.6 Depreciation `m 3.8 4.3 4.5 4.8 5.0 5.0 5.0 5.0 Interest @ 12% `m 9.6 12.6 13.5 14.1 14.7 14.2 11.7 8.1 PBT `m (11.9) (12.3) (7.8) 2.5 9.4 26.7 42.1 61.1 Tax @ 33% `m - - - - - 2.2 13.9 20.1 PAT `m (11.9) (12.3) (7.8) 2.5 9.4 24.5 28.2 40.9 PAT margins % - - - - 11.9 21.2 19.0 21.9 CAPEX `m 120 30 20 10 10 10 - - Dep `m 4 4 5 5 5 5 5 5 Net block `m 120 146 162 168 173 178 173 168 163 WC Loan `m 50 Loan (debt: equity - 1:1) `m 60 100 110 115 120 125 111.3 83.2 51.7 ROE % (9.5) (9.8) (6.2) 2.0 7.6 19.6 22.6 32.7 ROCE % (0.9) (0.4) 1.2 4.5 8.1 13.0 18.9 24.6 Please note the basic assumptions 1. Land is purchased and construction is initiated in the first year and the same is done phase-wise on a need basis. 2. Installed capacity is of 240 students per course for 10 different courses, this is increased gradually. 3. In the 9th year, the college reaches 100% capacity. Post that an annuity model is followed, unless new seats / courses are added. 4. Non-teaching staff is in the ratio of 1:35 for the first four years; later that ratio tilts to 1:45 when capacity hits 90%. 5. Maintenance capex is assumed to get expensed during the year. 6. The above does not include fees charged to students for various other activities. Source: Industry, Anand Rathi Research
  29. 29. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 28 Tutorials: An urban phenomenon This is the most unregulated and unorganized segment of the Indian education sector. We estimate the yearly revenue size of the industry at US$4.5bn in 2012 and at US$8bn by 2015. The unregulated nature of the industry has attracted much PE/VC funding. Integrated classroom coaching, the dominant part of the industry, currently accounting for over 80% of the segment, is faced with numerous challenges. While ICT-based coaching is likely to prosper at the cost of integrated classroom coaching, the process is likely to reduce the overall pricing power of the segment. Easy to launch The coaching industry has evolved over the years based on the requirements of the students. The current size of the industry segment is about US$4.5bn, with a CAGR of 20%. The entire segment is catered to by private players. The coaching industry is mainly an urban phenomenon – coaching in urban areas accounts for nearly 75% of the overall coaching market. This caters to parents/students who are looking for extra help outside school/college in order to improve their marks. It is by far the most unorganised and unregulated segment in the entire education chain. Most coaching institutes start on a low-scale, with teaching students next door, primarily at the residence of the student/teacher. Business gains momentum when the same teacher is also a part of a school/college and is promoted chiefly by word of mouth. The unit-level operating matrix for coaching institutes is very attractive, as fees are generally received at the beginning of the classes. Investment is required to scale up to full-fledged classes/new branches. However, once the same reaches optimum level (generally in 2-3 years) it runs at an EBITDA of 40-45% and helps fund other branches. The RTE Act prohibits schoolteachers from offering private coaching. While similar provisions prevailed in certain states in the past, such practices continue. Whether the RTE norms effectively curb the practice of private coaching by schoolteachers remains to be seen. Scaling up is an issue Coaching generally has a personal touch, as it starts with small private/group tuitions. Classes grow in size because of one or two star teachers who generally were at the launch. Post that, finding appropriate teachers to scale up is difficult. Moreover, once the new teachers gain a name, it becomes even more difficult to retain them. There is always a fear of star teachers leaving to start their own set-up or being poached by competitors. This is the biggest roadblock to scaling up. In order to overcome employee-related issues, big players are using strategies such as dividing one subject among 4-5 teachers. This reduces the importance of star teachers. Further, the introduction of online classes/usage of VSAT/Internet widens the reach and at the same time reduces the dependence on a few select teachers. From classroom to online coaching There are four types of test preparation institutes in India. These comprise: 1) integrated classroom programs, 2) technology aided – virtual class, 3) portal-based learning, and 4) distance learning. With the growing IT usage in India, virtual class and portal-based teaching are attracting The coaching industry is mainly an urban phenomenon – coaching in urban areas accounts for nearly 75% of the overall coaching market. The dominant classroom model is facing challenges from ICT-based coaching
  30. 30. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 29 more students then ever before.  Integrated classroom: Personalized counselling is the key driver in this area of test preparation. It caters to students' requirements and career needs on an individual level. Key market players in this segment are FIITJEE, IMS, Career Point, and JK Shah.  Technology-aided – virtual class: Virtual classes replicate a real classroom with the help of VSAT/VPN / broad-band via tie-ups with technology partners. Here students interact with instructors online using audio and video-conferencing facilities. Through this delivery platform, instructors deliver lectures at multiple locations simultaneously. This helps minimize time and cost in terms of resource deployment. It also helps reach those locations where setting up a full-fledged center may not be viable due to (1) non-availability of resources (most importantly, competent teachers), or (2) lower number of enrollments than the minimum required for profitable functioning. Everonn is the largest player in this segment. Other players in this segment include Career Point and Educomp.  Portal-based services: Such portals bring together applicants, students, alumni and teachers on a social network. Very little initial investment is required in this model. The services provided through such forums include discussion forums, ranking of schools and colleges, application forms of institutes, entrance test preparation material, SMS alerts, e-books and news, views and developments. Such forums generate revenues in various forms, including banner advertisements on the portal, paid newsletters, paid direct mail advertorials and sale of admission/ examination forms for specific institutions. Of late, video-based teaching also takes place on such portals. Edserv, Educomp and Info Edge are some of the important players in this segment.  Distance learning: Coaching institutes are well known for the simplified content that they provide and the mock tests that they conduct. Many students opt to take only the content and the test, either because this is a cheaper option compared to the classroom- based tutorials or because they prefer self-learning. This mode also helps reach geographies where full-fledged classes are not present. The distance-learning arm of any class is the most profitable, as it does not involve investing in infrastructure or teachers; content once ready does not involve much cost. The major cost involved is of marketing and setting up partners. FITJEE, Career Point, Brilliant, Bhansal and Resonance are some of the key players in this segment. Since it is not regulated and can be run for profit, a large number of deals (PE/VC funding) take place in this segment. Challenges before the coaching industry Integrated classroom coaching is currently the largest component of the coaching industry, accounting for over 80% of the overall revenue for the segment. This model is, however, facing two serious challenges. First, this segment is facing problems of accessing adequate number of competent instructors. The well-known (star) instructors, on the other hand, create problems of high attrition. Second, ICT-enabled coaching (mainly virtual class and portal-based teaching) is more cost efficient and scaleable than the integrated classroom coaching model. Yet, ICT-enabled services are being commoditised (inter alia, due to low capital investment requirement), thus impinging on the pricing power of the coaching industry.
  31. 31. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 30 Strict implementation of the RTE norm debarring schoolteachers from offering private classes or coaching would, on the one hand, increase the market size for the coaching industry and on the other hand aggravate the shortage of skilled instructors. Once again, these factors would be detrimental for the integrated classroom coaching model and beneficial for the ICT-based coaching model. We expect the share of integrated classroom coaching in the overall revenue of the coaching industry to fall (from over 80% currently) to less than 70% in the next five years. Fig 38 – Details of major coaching chains with PE/VC funding Name No. of centres Investors Description Career Launcher 250 Gaja Capital (USD 8Mn in 2007) Mainly works through the franchisee model in IIT, MBA coaching IMS 185 Milestone Religare (USD 5Mn in 2009) 185 centres that are part-owned and part-JVs. Involved in CAT, GMAT, GRE coaching T.I.M.E. 165 – Involved in GRE, GMAT, TOEFL coaching Franchisee model Plans to enter into pre-schools Career Forum 60 Focus on test preparation market for graduate, post- graduate and foreign education Gate Forum 50 Educomp (2011) Provides classroom coaching, correspondence courses Vidhyamandir Classes 48 Focus on engineering and medical entrance tests Aakash Inst. 47 – Focus on engineering and medical entrance tests Professional Tutorials 45 – Operates a franchisee model for test prep in graduation and post-graduation entrance tests Tandem Group 40 – Involved in CAT, NIMCET, IIT-JEE, AIEEE prep Career Point 34 Franklin Temp (USD 10Mn in 2009) A publicly listed firm. One of the largest coaching institutes. Now diversifying into K-12 Pathfinder Educational Centre 23 – Prepares students for Madhyamik, H.S., WBJEE, ICSE, AIEEE, CBSE-PMT and IIT-JEE Vidyasagar Classes 22 – Coaches over 9,000 students annually Involved in graduation entrance test prep Brilliant Tutorials 10 – No franchises Involved in engineering, medical , IAS entrance tests Is shifting from correspondence to classrooms Bansal Classes 7 – Over 50,000 enrolments for Involved in engineering, and medical test prep Smart Learn Telcomp 3 EdServ Infosystems Involved in graduate learning programs. Mainly in the south JK Shah Classes 12 Mumbai-based coaching classes. Strong in CA coaching, recently entered CFA and college prep. MTeducare 92 Helix partners Dominant player in Maharashtra, Karnataka and Gujarat. Focus on school, college-level coaching Source: Companies, Anand Rathi Research
  32. 32. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 31 Vocational training To fulfil India’s growing need for skilled manpower across sectors and narrow the existing gap between the demand and supply of skills, the Government of India targets imparting nine or ten technical skills, including retail and hospitality, to 500 million citizens over the next 10 years. India has always faced serious challenges in producing sufficient skilled technicians. The strong economic growth over the last decade and the consequent increase in demand for such skills has further increased the demand for such skill providers. The key problem in the area of vocational training is that the aspirants for such training lack the finance to undertake such courses. The organised financial system also generally does not extend such funding due to the high transaction cost for such small loans and the lack of bankable collateral. Currently, prospective employers are coming forward to sponsor such courses, often through in-house training facilities, backed by job guarantees at the end of the training. As the scale of such training increases, this sector is likely to see rapid growth. NSDC to narrow demand-supply gap in manpower National Skill Development Corporation (NSDC) was set up as part of a national skill development mission to fulfil India’s growing need for skilled manpower across sectors and narrow the existing gap between the demand and supply of skills. The Finance Minister announced the formation of the NSDC in his Budget speech of 2008-09. The NSDC is a public-private partnership, 49% owned by the Finance Ministry and the remaining 51% held by industry bodies such as the CII, NASSCOM, FICCI and Assocham. The Government of India targets imparting skills to 500 million citizens over the next 10 years. NSDC was set up with the objective of achieving 30% of this target, or 150m trained people, by 2022. NSDC enters into a JV with leading players for 10-15 years. The private partners provide equity and NSDC provides loans at a concessional 6- 7.5% rate with a tax holiday for the initial period of 3-5 years. Training is in 10 technical skill-sets including retail and hospitality. The course fee for technical courses ranges from `3,000 to `24,000. Fig 39 – Skill development: formal and informal Skill Development Formal Informal Professional colleges Vocational education in secondary schools Technical specialized institution Apprenticeship training Family occupation Self directed On job training Source: Anand Rathi Research Prospective employers are coming forward to sponsor vocational courses, often through in-house training facilities, backed by job guarantees. As the scale of such training increases, vocational training is likely to take-off in a major way.
  33. 33. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 32 Fig 40 – Key areas of technical training Airlines Flight & cabin crew Ground services Administration Cargo management & handling Engineer English spoken Accent building Language improvement Financial services Insurance Accounts & Taxation Banking Office assistant Retail Purchasing Storekeeping Marketing Salesmanship Information Technology IT enabled services Programming Testing Computer graphics Others Textiles Jwellery designing Beauty & cosmetics Source: Anand Rathi Research Fig 41 – Key players in skill training and vocational education Company Sector Brief info ICA Infotech Vocational training 450+ centers with courses in accounting, finance and stock market-related courses, with 100% placement guarantee. Prolific Systems and Technologies Vocational training 22+ automation training centres all over Asia. Global Talent Track Vocational training Global Talent Track floated a business school called Europe Asia Business School (http://www.eabs.ac.in) TeamLease Services Vocational training People supply and HR training company IIJT Vocational education As of 2010, IIJT operates 120 educational centers across the country. Teamlease Education, backed by Gaja Capital invested INR 31.88 Cr for a 74% stake in the company in Mar 2010.Teamlease subsequently increased its stake to 95% as of Mar 2011. Aspire Human Capital Management Vocational products (content) Provides skill and language training products to B-schools, colleges, universities etc. Shree Eduserve Vocational (English language training) Founded in 2006, Shree Eduserve currently has over 65 centers across the country and has a special focus on the English language training segment. Orion Edutech Vocational (call centers) Certification courses in the BPO segment with 100% placement IFBI Vocational training Provides diploma courses for BFSI segment. Tie-up with ICICI, HSBC and other banks. Part of the NIIT group. Speak well Vocational (English language Training) Provides spoken English training. Has 50+ branches in Mumbai Aptech IT / Animation training Present in 40+ countries. Provides training in computer, animation, multimedia, hardware, aviation, hospitality, retail and English language. NIIT IT training Present in 45+ countries. Provides training in computer, BPO, banking, and on-the-job corporate training for enhancing skills. Source: Companies, Anand Rathi Research
  34. 34. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 33 Fig 42 – Skill training: drivers and opportunities Challanges     Lack of financial institutions support Individual perception Lack of quality trainers Lack of equipments & machinery for training Drivers     Demand for skilled workforce increasing with growth in service sector Inefficient public education system Lacking employability skills based education system Competitive business environment Technical training Source: Anand Rathi Research Fig 43 – Porter’s 5 forces Porter’s 5 forces Degree of threat Remarks Bargaining power of buyers Medium Number of training institutes is low and mainly located in urban regions. Buyers prefer players that offer placement guarantee or have a good brand name. Bargaining power of suppliers Medium Non-availability of adequate skill manpower in rural region to run vocational centers is addressed by offering students trained by the centre part-time / full-time jobs. Further technology is used to conduct classes in a virtual environment. Threat of substitutes Medium Vocational training in itself is a substitute for formal education. However, training is provided on-the-job to upgrade skills of the existing manpower. This again, is tied up with a service provider. Threat of new entrants Low to medium NSDC is tying up with several players to address the huge demand-supply gap. With the huge mis- match in demand-supply there is room for many more players. Industry competitors Medium Many players already exist in the segment. Quite a few players in the formal education space are also expanding their horizons and are keen on getting their share of the larger pie. Source: Anand Rathi Research
  35. 35. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 34 Public policy: the good, bad & ugly Ongoing legislative efforts with regard to accreditation, academic depository and malpractices are expected to result in better quality of educational institutions. However, the enforcement of some of these norms remains questionable, as there is no change in the existing system of supervision at the ground-level or in enforcement. In addition, the RTE Act is likely to have a negative impact on private institutions involved in elementary education. While for- profit education is no panacea, not allowing the same would effectively bar various credible players, including eminent foreign institutions, from entry to the Indian market. The driver of private investment in education is likely to remain burgeoning household spend rather than supportive public policy. Challenges before the public policy makers The Indian Constitution places education on the “Concurrent List” whereby both the Centre and the various states have legislative and executive powers over the education system. The broad objectives of the public policy on education in India are to ensure universal access, equality and quality. However, several challenges exist: Issues of quality and incompatibility of the curriculum with industry-required skill sets. Lacuna within the Indian education system include the generally poor quality of education, large shortage of qualified teachers, low enrolment ratio at secondary education onwards compared to peers, inadequacy of post-elementary education facilities at the required scale, a gulf between academic curriculum and industry skill requirements, lack of innovation and quality research and lack of internationally acclaimed institutions (Planning Commission, 2011). Bridging the skill gaps to make the vast majority of the Indians cross the bar of “employability” is crucial if India has to reap the benefits of the much-publicised “demographic dividend” bestowed to the country. This at once requires expansion and quality improvement. Need for checks and regulations against malpractices. Private investment helps offset the funding crunch in the educational systems but could affect the accessibility of poorer income groups to education. In addition, the privatisation of technical and professional education has also brought up issues such as the serious shortage of infrastructure, technical expertise and teaching facilities. Charges of underhand practices in private institutions reinforce the need for effective regulation, transparent systems and the supervision of private education. Public policy ambivalence to continue Public policy remains against for-profit education While the authorities frown upon for-profit private education on paper, in practice the same continues with the knowledge and ‘patronage’ of public officials, either through ‘cooking’ the accounts (Dixon and Tooley, 2005), generating surplus outside the education trust/society, or operating in niches of Indian education that are largely outside the scope of public policy. Bridging the skill gaps to make the vast majority of the Indians cross the bar of “employability” is crucial if India has to reap the benefits of the much-publicised “demographic dividend” bestowed on the country
  36. 36. 29 December 2011 India Education – US$45bn private education opportunity: Everyone wants a slice Anand Rathi Research 35 Extensive legislative action on the anvil In order to meet the public policy objectives and to address the existing inadequacies of the Indian education system, several legislative actions are currently underway. These include:  Putting in place adequate accreditation structure to ensure education quality,  Quick redress of disputes relating to the educational system,  Prevention of malpractices in the sector,  Establishment of a national level apex body for education replacing the current multiplicity of authorities with overarching jurisdictions and mandates, and  Setting norms to attract capable and authentic private players, including foreign education providers to the sector. As part of ongoing education sector reforms, an important legislation has been passed in the recent past and five major bills are at various stages of deliberation in the Indian Parliament. The Act and the bills, if passed by the Parliament, are likely to have major implications for private investment in the education sector. Right of Children to Free and Compulsory Education Act (RTE) One of the landmark acts on education is the Right of Children to Free and Compulsory Education Act (RTE), 2009, which came into effect on 1 Apr ’10. This Act provides the right to all children between the ages of six and 14 years to have free and compulsory elementary education (standards I to VIII), in a neighbourhood school. Under the Act, private schools providing elementary education are required to provide free and compulsory elementary education to at least 25% of students from the weaker section and disadvantaged groups in the neighbourhood. If the school also offers pre-school education, then the reservation would be applicable for such levels as well. Private pre-schools not providing elementary education (standard I to VIII) have an advantage, as they would not fall under the RTE. The schools would be reimbursed for either the tuition charge or the per-student expenditure in government schools, whichever is lower. We estimate this at `3,600 per year, per student, which is far lower than the tuition fee in urban centres, where 60% of private school students are based. This would be revenue and profit decretive for urban private schools, especially those in larger cities levying high tuition fees. In addition, if the 25% reserved quota is filled, the total reimbursement amount by the government can run up to `400bn (US$8bn) or 2% of the overall public spend on education. In view of these, questions remain on the practicality of the RTE ACT. Non-compliance of infrastructure, teacher and teacher qualification norms specified by the Act within the three- year timeframe, would lead to withdrawal of recognition and closure. If a school continues to operate, it would attract penalty up to `100,000 and `10,000 per day. Interestingly, public schools have no specific penal action for non-compliance by them. The RTE also prohibits charging of any capitation fee, contravention of which would attract penalty up to 10 times of the capitation fee charged. The Act also prohibits any child or parent screening for school admission, contravention of which would attract penalty up to `25,000 in the first instance and Rs.50,000 for every subsequent contravention. The Act prohibits teachers from undertaking private tuition or private teaching activities. The National Accreditation Regulatory Authority (NARA) for Higher Educational Institutions Bill, 2010 Currently, accreditation of institutions involved in higher education is voluntary. Only around 20% of the collages and 30% of the universities are accredited. NARA makes accreditation mandatory for all institutions involved in higher education (apart from agriculture, which is a state subject) and all courses offered by them also have to be accredited. The bill establishes NARA for higher education, which shall register and monitor accreditation agencies. These agencies, in turn, would accredit institutions. The accreditation bill allows only government-owned bodies to set up accreditation agencies.

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